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A Wave Of Disappointing Housing Data Has Some Economists Doubting A Taper Announcement Today

The latest batch of housing data has been disappointing, as home buyers have got anxious about the rise in mortgage rates.

"Housing starts began to level off early in the year; mortgage applications have been weak since early May; and while existing home sales have continued to rise, new home sales plunged in July," writes Bank of America's Ethan Harris.

Let's take a quick look at some of the latest numbers.

The 30-year fixed mortgage stood at 4.57% according to the latest Freddie Mac survey. While this is more affordable than the historical average, home buyers are still getting used to the idea that mortgage rates aren't at record lows anymore.

After running up for four straight months, homebuilder confidence held steady at 58 in May. NAHB chairman Rick Johnson pointed out that homebuilders were reporting "hesitancy on the part of buyers due to the sharp increase in interest rates."

What's more homebuilder confidence, which is typically considered a good leading indicator for housing starts, has been decoupling from the latter.

Housing starts missed expectations rising just 0.9%, while permits fell 3.8%. It is important to point out that today's number was largely impacted by a highly volatile multi-family sector, single-family starts posted an "encouraging gain," according to Paul Diggle at Capital Economics. But the overall trend in housing starts has been well shy of what homebuilder sentiment would lead one to expect.

housing starts august

Capital Economics

July new home sales data also disappointed markets, coming in at an annualized rate of 394,000, and median price for new homes fell to $257,200, the lowest level since January.

And the pace of home price growth has slowed too according to the latest Case-Shiller data. Economists have for some time said they expect home prices to slow, largely because the pace is unsustainable, because it's getting harder for investors to find bargains and because inventory has bottomed.

How will this factor into a decision on the taper?

The taper refers to the Fed's decision to slow its $85 billion monthly asset purchase program, that could be announced today. Bank of America expects the Fed to delay the taper till December.

David Mericle of Goldman Sachs is of the view that the rise in mortgage rates is just one of the reasons that housing data has disappointed markets, but that the slowdown makes the case for a "soft taper."

Using a proprietary model to gauge the impact of rising mortgage rates on housing, Mericle finds two key things:

"First, the rise in mortgage rates can explain some but not all of the slowdown in the housing data. Second, the largest impulse from the rise in mortgage rates, especially on housing starts, will probably not appear until the August data.

"We conclude by estimating the impact of the recent rise in mortgage rates on GDP growth. We expect a 15-20bp growth drag through residential investment over the next year as a result of the negative impulse to starts and home sales (the latter contribute broker and transaction fees). We also expect a 5-10bp growth drag through consumption as a result of a smaller wealth effect from the reduced impulse to house price appreciation...

"Despite the negative impulse from higher mortgage rates, we still expect housing to make a positive contribution to growth overall. …Nevertheless, the recent slowdown in the housing sector and the likely further weakness suggested by our model add to the case for a soft taper tilted toward reducing Treasury rather than MBS purchases."

That being said, the data are grounds for the Fed to announce a soft taper.

"While we still expect housing to be a positive contributor to growth overall, the near-term impact of rising mortgage rates is another reason why the FOMC is likely to lean toward a soft taper tilted toward reducing Treasury rather than MBS purchases," writes Mericle.

Gloom and doom economist Nouriel Roubini thinks housing data is part of the reason a taper may be delayed:

Contrary to market consensus the Fed should not and may not start tapering today as recent macro & housing data are weak. At most taper-lite

And Paul Diggle at Capital Economics doesn't think the taper, if it is announced today, will have a huge impact on the housing recovery. "Mortgage rates remain very low in an historical context, and the increase from here should be much more gradual. The bottom line is that housing starts are set to rise further."

It appears that recent housing data has been disappointing enough for the Fed to delay the taper, or announce a soft taper at most.